A.M. Best Affirms Credit Ratings of Teachers Insurance and Annuity
Association of America and Its Subsidiary

June 12, 2018 04:05 PM Eastern Daylight Time

OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has affirmed the Financial Strength Rating of A++
(Superior) and the Long-Term Issuer Credit Ratings of “aaa” of Teachers
Insurance and Annuity Association of America (TIAA) and its wholly
owned insurance subsidiary, TIAA-CREF Life Insurance Company
(TIAA-CREF Life). TIAA and TIAA-CREF Life are collectively referred to
as the TIAA Group. A.M. Best also has affirmed the Long-Term
Issue Credit Ratings of “aa” on TIAA’s $1.05 billion 6.85% surplus notes
due Dec. 16, 2039, $1.65 billion 4.9% surplus notes due Sept. 15, 2044,
$2 billion 4.27% surplus notes due May 15, 2047, and $350 million fixed
to floating rate 4.375% surplus notes due Sept. 15, 2054. The outlook of
these Credit Ratings (rating) is stable. TIAA and TIAA-CREF Life are
domiciled in New York, NY.

The ratings reflect the TIAA Group’s balance sheet strength, which A.M.
Best categorizes as strongest, as well as its very strong operating
performance, very favorable business profile and very strong enterprise
risk management. The rating affirmations reflect TIAA’s market leading
position in the higher education and not-for-profit pension
marketplaces. TIAA, together with its companion organization, College
Retirement Equities Fund (CREF), enjoys significant economies of scale,
and combined they form one of the largest retirement systems in the
United States with combined assets under administration of $1.1 trillion
as of year-end 2017. TIAA-CREF Life’s primary products are life
insurance, individual annuities, funding agreements and separate account
guaranteed interest contracts. Individual life and annuity products are
marketed to existing customers of TIAA, as well as to the general public.

The rating affirmations also reflect TIAA’s strongest level of
risk-adjusted capitalization, as measured by Best’s Capital Adequacy
Ratio (BCAR). Risk-adjusted capitalization has been enhanced by its very
strong operating performance that has more than offset investment losses
in recent years. A.M. Best notes that TIAA maintains significant
statutory accounting flexibility to manage its risk-adjusted capital
position with the ability to adjust crediting rates on its large
in-force block of general account retirement annuities. In addition,
TIAA utilizes a conservative approach to valuing certain statutory
reserves, and as a result, its balance sheet contains a considerable
amount of hidden capital. A.M. Best also notes that TIAA’s current
adjusted financial leverage is prudent, and operating leverage is
minimal.

Additionally, A.M. Best views favorably TIAA’s unique liability
structure, whereby approximately three-quarters of its general account
reserves are not cashable and only can be received as a death benefit or
in the form of a periodic annuity payout. Contract holders may transfer
funds from TIAA to CREF or to another employer-approved funding vehicle,
but typically in the form of a 10-year annuity payout. TIAA’s long
insurance liability structure, coupled with its low liquidity needs,
allows it to take advantage of typically higher yields offered by
investments that are less liquid and of longer duration. TIAA does not
provide living benefit guarantees on its variable annuities, and its
exposure to guaranteed minimum death benefits is limited.

A.M. Best also considers TIAA’s investment management capabilities to be
extremely strong and notes that the overall investment portfolio has
generated moderate levels of investment losses in recent years. Although
A.M. Best believes any near-term asset impairments for the group will be
more than offset by net operating gains, it remains concerned regarding
the group’s sizeable and increasing exposure to real estate assets and
Schedule BA assets. A.M. Best believes the potential remains for
material credit losses from TIAA’s real estate holdings should the
global economy deteriorate.

Although net operating performance supports the assessment of very
strong, A.M. Best notes that the majority of TIAA’s earnings are derived
through active spread management of its core pension businesses.
However, with the majority of its pension businesses having 3% minimum
interest rate guarantees, A.M. Best believes TIAA may be challenged to
sustain and improve its historical net operating performance, as it
continues to navigate the persistent low interest rate environment. To
mitigate its exposure to these relatively high minimum interest rate
guarantees over the long term, TIAA utilizes an indexed minimum interest
rate guarantee for new institutional and individual retirement accounts.
Additionally, the recent acquisitions of Nuveen Investments, Inc. and
EverBank Financial Corp have added additional net operating earnings
diversification and added further scale to TIAA’s existing asset
management and banking businesses.

While TIAA continues to hold its dominant position in the niche U.S.
higher education pension market, its dominance has been challenged in
recent years by strong brand-name, low-cost mutual fund firms that offer
a wide array of non-guaranteed investment options. Although A.M. Best
does not believe TIAA’s existing customer relationships would be
affected significantly, it does believe TIAA could be challenged to
attract new customers in this highly competitive market. In response,
TIAA has engaged in marketing strategies focused on strengthening its
brand awareness and customer reach.

Factors that could result in negative rating actions include a
significant and sustained decline in risk-adjusted capitalization, as
measured by BCAR, or a material and sustained decline in net operating
performance.